We live in the age of “Have it fast! Have it now! Have it without hassle!” At the same time customers are demanding ease in online transactions, businesses are naturally seeking to meet consumer demand while reducing administrative costs. In the digital push toward the automatic renewal of everything from the purchase of goods and services to memberships and subscriptions, businesses offering automatic renewal must be cognizant of the often overlooked regulations that may apply.
The Maze to Traverse
While an automatic renewal may seem simple enough, there is a complex regulatory scheme that governs it — including federal, state, and even merchant card agreement requirements with — which each business must ensure compliance, particularly when the automatic renewal occurs in an online transaction.
Congress enacted online shopper protections as early as 2010. Those protections include “negative options marketing on the internet,” which regulates the method by which a business may charge certain recurring charges to consumers. In late 2021, the Federal Trade Commission (FTC) issued a news release advising that it intended to ramp up enforcement efforts to address what it referred to as tricking and trapping consumers into subscriptions. In so doing, it issued an Enforcement Policy Statement Regarding Negative Option Marketing. As the FTC noted, “[its] policy statement puts companies on notice that they will face legal action if their sign-up process fails to provide clear, up-front information, obtain consumers’ informed consent, and make cancellation easy.”1
In addition to federal oversight, there is a patchwork of about 20 states that regulate automatic renewals and at least six states2 that have introduced legislation just this year. Clearly there is a move toward regulating this practice.
The state legislation generally requires, in addition to other things, certain prescriptive notices to be provided to consumers prior to the date the automatic renewal takes place and an opportunity to opt out of the automatic renewal. In fact, in both California and Virginia, new legislation is set to take effect in July 2022 and January 2023, respectively, that will further require conspicuous online options to cancel certain automatic renewals.
In 2021, The Washington Post reached a settlement agreement in a class action suit worth nearly $7 million related to allegations it violated a number of laws and required in the prospective relief to “provide automatic renewal terms on its checkout pages in a manner that is consistent with the requirements of Cal. Bus. & Prof. Code §§ 17600, et. seq.”
Providing further insight into the potential view of state attorneys general on the matter, the New York Attorney General issued a consumer alert in late 2021 warning customers about “schemes aimed at trapping consumers in recurring payments.”
Finally, it should be noted that just because automatic renewals are not specifically regulated by a state, it does not mean a business is “out of harm’s way” in offering such renewals. States without such laws may rely on laws prohibiting unfair, abusive, and deceptive practices to regulate the business’ behavior.
Merchant Card Agreement Rules
In addition to federal and state requirements, businesses should review their merchant card agreement rules for automatic renewal notice requirements. For example, both Mastercard and Visa have adopted rules implicating automatic renewals and require certain additional notifications to their cardholders.
So, Is Automatic Renewal Worth the Hassle?
The use of automatic renewal programs likely reduces hassle for the consumer and processing costs for the business while simultaneously boosting revenue. However, with the regulatory scheme surrounding automatic renewals, there may be additional compliance costs for those deciding to institute an automatic renewal program.
Businesses entering into an automatic renewal business model should consult with counsel to avoid potential pitfalls.
1 This analysis does not include the requirements of Regulation E, regulating preauthorized transfers, which the business should also consider.
2 Kentucky, Michigan, Missouri, New Jersey, Pennsylvania, and Rhode Island.